Unit 1: Basic Economic Concepts

see big notebook for terms in flashcards

scarcity

economic principle that states that products are finite in supply

what are the four economic resources?

land (resources from nature)

labor (human effort to produce resources)

capital (machinery, tools, equipment)

entrepreneurship (innovation/ideas)

payment for land

rent

payment for labor

wages

payment for capital

interest

payment for entrepreneurship

profit

what ISN’T an economic resource?

consumer goods, waste, money/stocks, etc.

what’s the fundamental economic problem?

wbat will be produced, how will goods/services be produced, who will get goods/services

command economy

government solely makes economic decisions (answers what, how, who)

market economy

individuals who own/produce make economic decisions (answers what, how, who)

mixed economy

mix of market + command economy

(most common)

what’s the relationship between households and firms?

consumers and sellers

what are the most common ways of allocating resources (allocation systems)?

command system (based on priority) and prices (whoever can pay can get the good/service)

traditional economy

economy is dictated by cultural customs (EX: placing value on important animal)

opportunity cost

how many x product is being given up to produce y product

(EX: in making 1 bag, i lose the opportunity to make 3 keychains in that same time)

how do you calculate opportunity cost?

opportunity cost of product x = cost (loss in creating y) / gain (how much x you create)

production possibility curve (PPC)

curve showing how much of product x (x-axis) can be produced while producing product y (y -axis)

what does a PPC with a constant opportunity cost look like?

curve is linear

what does a PPC with an increasing opportunity cost look like?

curve is “bowed out” to the right

absolute advantage

ability to produce more of a good/service than another person w/ same resources

comparative advantage

ability to produce something at a lower opportunity cost

output problem

asking how many products can be produced with x amount of resources

opportunity cost = cost / gain

input problem

asking how much resources (EX: time) does it take to create x amount of product

opportunity cost = gain / cost

terms of trade

exchange must fall between opportunity costs of the (usually) two products ( opp a < optimal price < opp b)

explicit cost

monetary cost (like from price tag)

implicit cost

non-monetary cost (like opportunity costs)

marginal utility/cost

additional benefit/cost gained from an additional unit of the product

utility and utils

measure of satisfaction gained from benefit

total net benefit

total benefit - total cost (difference between them)

what is the most optimal net benefit?

the greatest value (biggest difference between TB - TC in the dataset)

law of diminishing marginal utility

as a consumer purchases more, additional satisfaction falls with each unit

what does the (diminishing) total utility curve look like?

it increases at a decreasing rate (because of diminishing marginal utility)

maximimizing utility (MU) formula (between 2 goods + 2 prices)

MU x / P x = MU y / P y

if MU x / P x > MU y / P y, buy more of product x (vice versa)